The latest PitchBook numbers, which show mergers and acquisitions well below recent historic norms, do not necessarily tell the whole picture. There are plenty of deals out there... but there are also reasons why deals are not completing.
1 Board cautiousness. While boards want to do deals and are actively looking, the geopolitical uncertainties relating to US strategy, protectionism and Brexit are causing caution around final sign off. Boards want investors to be comfortable that the M&A risk has been factored into their decisions, so there is more informal 'sounding out' than has historically been the case.
2 Poor VDD. Acquirers are very frustrated by the quality of preparedness of sellers. This theme runs through every deal without exception. Seller advisers need to revisit this as part of any process - there will be a kick-back coming.
2 Aggressive financial sponsors. Corporates are seeing pre-2008 terms by financial sponsors selling no warranties, locked box and 'buyer beware'. Many deals include warranty and indemnity insurance but, again, some corporates feel the equilibrium is too far in favour of sellers and it is holding up deals.
3 Electronic data rooms. A refrain again from all buyers.... has enough though be put into content? "Drip, drip, drip" was a comment I heard from one buyer and "this means drip, drip, drip in approvals"!
4 Compliance. Too many targets seem to have systems requiring much correction. Again, seller advisers need to address rectification upfront, not simply disclose issues.
5 Regulatory clearances. Many deals are stuck in anti-trust review processes. As more countries see cartel filings as income generators, getting filings in and cleared quickly is going to be an increasing issue.
6 Foreign currency restrictions. The tightening of Chinese FDI means there are fewer Chinese buyers when it was predicted there would be more. Understanding funding constraints from Asian buyers is key to European sellers.
7 Fewer financial sponsor to financial sponsor deals. Surprisingly, there has been less sponsor-to-sponsor deal activity than normal. Financially, sponsors have plenty of firepower but financial sponsor sellers are surprisingly cautious right now around flipping to another sponsor, so are instead increasingly exploring IPOs.
On the positive side, it is not that the market is quiet - advisers are busy. The PitchBook stats show a broad spread of sectors and the headlines would support the view that FinTech in particular is highly active.
I think 2017 will turn out as a normal year, notwithstanding an apparent slow first half.
M&A during the first half of 2017 in 5 charts